Healthpeak Properties Inc (PEAK) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter and year-end 2007 HCP earnings conference call. My name is Shaquana and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's conference call, Mr. Ed Henning, HCP's Executive Vice President and general counsel. You may go ahead, sir.

Thank you. Good afternoon and good morning. Some of the statements made during this conference call contain forward-looking statements. These statements are made as of today's date, reflect the Company's good faith belief and best judgment based upon currently-available information and are subject to risks, uncertainties and assumptions that are described from time to time in the Company's press releases and SEC filings. Forward-looking statements are not guarantees of future performance.

Some of these statements may include projections of financial measures that may not be updated until the next earnings announcement or at all. Events prior to the Company's next earnings announcement could render the forward-looking statements untrue, and the Company expressly disclaims any obligation to update statements as a result of new information. Additionally, certain non-GAAP financial measures will be discussed during the course of this call. We have provided reconciliations of these measures to the most comparable GAAP measures, as well as certain related disclosures, in our supplemental information package and earnings release, each of which has been furnished to the SEC today and is available on our website at www.HCPI.com.

I'll now turn the call over to our Chairman and CEO, Jay Flaherty.

Thanks, Ed, and good morning from the West Coast. 2007 was the most successful year in HCP's 23-year history; reported FFO growth of 18%, investments of $4.7 billion, dispositions of $1 billion, joint venture contributions of $1.7 billion, capital raised of $6.3 billion, and a revenue quality mix of 94%. As importantly, 2007 brought to a close the multi-year repositioning of HCP's portfolio and the build-out of the Company's product platform. I will comment further on each of these issues, but let me now introduce Executive Vice President and Chief Financial Officer, Mark Wallace, and Executive Vice President and Chief Investment Officer, Paul Gallagher. Mark will review our 2007 results and Paul will detail the HCP portfolio. Mark?

Thanks, Jay, and good morning, everyone. Our investment in Manor Care just before we closed the books on 2007 capped off an active and successful year for HCP. The cornerstone was our $3 billion acquisition of Slough Estates, but notable as well was the growth of our investment management platform with assets under management now approaching $2 billion. These transactions, along with other initiatives of our acquisition and asset management teams continued to both expand our business platforms and significantly reposition our portfolio. From a financial standpoint, 2007 was equally successful. As Jay just mentioned, our reported FFO increased 18%, while FFO before impairment and merger costs was up 13%. Our FFO payout ratio on a reported basis was 83%, and 79% before merger and impairment charges.

Let me turn now to our fourth-quarter investments. Our $900 million investment in Manor Care pays interest at LIBOR plus 4% on the face amount of $1 billion. For GAAP purposes, the discount is accreted to income, resulting in an effective yield at close of LIBOR plus 550. Manor Care generated just over $3 million of interest income during the fourth quarter. The debt has a five-year term, maturing in January 2013, subject to extension test in the fourth year. It is prepayable in the first year subject to yield magnets. Our investment is secured by an indirect pledge of equity ownership in Manor Care facilities and was subordinate to $3.6 billion of other debt. At closing the loan-to-value ranged from 66% to 85%. During the fourth quarter we also acquired three life science buildings, which are all 100% leased, for $46 million with a weighted average yield of approximately 7.1%, and funded $59 million of development and other capital projects. We sold eight properties during the quarter for $27 million at a weighted average exit yield of 6% and recognized over $11 million in gains, although such gains are not reflected in FFO.

While the dislocation of the credit markets has certainly affected the cost of financing across the industry, we continue to have access to our traditional sources of capital and have made substantial progress deleveraging our balance sheet. Capital market transactions during the fourth quarter included the issuance in October of nine million common shares for $303 million in net proceeds, and the issuance of 600 million of ten-year 6.7% senior unsecured notes. These transactions, and the earlier sale of 41 properties to Emeritus, generated $1.4 billion of proceeds, which we used to reduce our bridge loan to its current balance of $1.35 billion. At this reduced level, the final maturity of our bridge loan can now be extended to July 31, 2009.

At year end our overall leverage ratio was 57%, down from 62% at the announcement of Slough. Our secured debt ratio is at 12%, our unsecured leverage ratio stands at 68%, and our trailing fixed charge coverage for 2007 was just over two times. Floating rate debt represents 36% of our total debt at year end. However, our Manor Care investment provides a natural hedge, which effectively reduces our net floating rate exposure to about 24%. During the fourth quarter we also executed $900 million of forward starting swaps to hedge future anticipated debt issuance. Our debt maturities for 2008 are limited to $300 million of floating rate senior unsecured notes due in September and $95 million of mortgage debt amortization. As of the close of business yesterday we had $878 million drawn on our $1,5 billion revolver, net of unrestricted cash.

Reported FFO per diluted share for the full-year 2007 was $2.14. Excluding $22 million of merger-related cost, FFO was $2.24. For the fourth quarter, FFO per diluted share was $0.54, including $3.8 million, or $0.01 per share of merger-related charges. Merger costs for the quarter included $800,000 of G&A expense related to integration efforts and $3 million of interest expense related to bridge loan fee amortization. Same property NOI for 2007 was up 4.3% on a GAAP basis and 2% on an adjusted NOI basis. We have signed leases for all of the space at the former Elan campus in San Diego that was vacated during 2007 and adversely impacted last year's same-property results. If you eliminate the effect of this single property, our overall adjusted NOI growth was 3%.

Each of our other segments reported solid adjusted NOI performance. Skilled nursing came in at 4.2%, senior housing at 4.1% and medical office buildings at 3.2%. Keep in mind our consolidated same-property portfolio at year end excludes assets acquired in our purchase of both Slough and CNL Retirement Properties and assets formerly included in our GE joint venture. Therefore, same property pool represented less than one-third of our total properties at year end. The assets we acquired from CNL and our former GE JV will be included in same-store results starting the first quarter of 2008 and will increase the same property pool to about two-thirds of our total investments.

Regarding guidance for 2008, we expect reported FFO to range between $2.26 and $2.34 per diluted share. The midpoint of that range represents a growth rate of 7.5%. That growth is primarily driven by our Slough portfolio and the return on our investment from Manor Care, partially offset by anticipated asset dispositions to complete our deleveraging plan. Our life science segment contribution to 2008 NOI comes from a combination of lease-up activity, contractual escalators and occupancy gains, as well as developments coming online.

Let me provide a few of the key assumptions that underlie our 2008 guidance. Our guidance contemplates no acquisitions of real estate or debt investments and no contributions of assets into joint ventures. We expect to fund $100 million of development and expansion projects, principally in our life science sector. Asset dispositions are expected to be between $700 million and $850 million. Gains for the full year reported for GAAP earnings on these dispositions should range between $200 million and $300 million. Our investment management platform should generate $600 million in fee income. Same property portfolio growth, based on adjusted NOI, is expected to range between 2.5% and 3.5%. General and administrative costs should range between $70 million and $80 million, or roughly 6.5% of total revenues. Proceeds from anticipated capital market transactions during the year will be used to repay existing debt. And merger costs for 2008 should be about $4 million, or $0.02 per diluted share, primarily in the amortization of remaining bridge loan fees. Last, we've revised our financial disclosures this quarter, particularly the portfolio section of our supplemental package. We appreciate your suggestions and hope you find the new information helpful.

And with that I'll now turn the call over to Paul.

Thank you, Mark. The past year has brought many changes to HCP's portfolio; the addition of the Slough life science portfolio and development pipeline, a $2 billion investment management platform, expansion of our mezzanine debt platform through our Manacare investment, and significant capital recycling from asset sales. Our portfolio now has five distinct segments; senior housing, life science, medical office, hospitals, and skilled nursing. We have enhanced our supplemental reporting package by breaking out these segments with additional disclosures including lease expirations, leasing and releasing performance, property age, and percent of pooled properties. We have broken out total property performance along side same-store performance by segment on a sequential and year-over-year basis. This way you not only see same-store results, which Mark mentioned is less than a third of our portfolio, but you see how changes to the overall portfolio affect performance within each segment. Additionally, we modified the definition of cash flow coverage. The calculation previously was trailing 12-months EBITDAR divided by annualized rent. We now divide EBITDAR by trailing 12-months base rent and additional rent to more accurately reflect historical facility performance.

Now, let me take you through the five segments of our portfolio. Senior housing. ACP senior housing consolidated portfolio consisted of 246 properties, of which 68% of our total investment is located in mixed top-31 MSAs. The leases typically have an initial term of 15 years and 87% of our leases have renewal options. Our average remaining lease term is just under 11 years, with less than 9% of the portfolio's rents rolling over the next five years. Rents typically have annual escalators and generally reset to fair market upon execution of renewal options. Purchase options are less prevalent, with only 24% of our properties subject to purchase options. The majority of these options are set at fair market value. We structure our leases to provide additional security, with 85% of our senior housing properties pooled through master leases, pooling agreements or cross guarantees. In addition, we often receive additional credit enhancement in the form of downstream guarantees from either the parent company or the principal of our operator, cash collateral in the form of security deposits or letters of credit, or a combination of both.

With regard to 2007 performance, HCP's senior housing segment reported same-store cash NOI growth of 4.1% year over year. Senior housing occupancy remains stable at 90.8%. Despite concerns over the impact of the housing downturn, we have yet to see an impact to occupancy in our portfolio, either by operator or location. With regard to our Sunrise assets, property level NOI year over year, excluding one-time items, grew at 5% and average occupancy increased 160 basis points to 90.7%. Cash flow coverage of 0.93 times was impacted by expense growth in the portfolio over the prior year. We have been working with Sunrise on expense management and we began to see improvements in the trend in the latter half of 2007.

Medical office. Cash same-store performance for the year was up $3 million or 3.2% over 2006, driven by improvement in base rent, which was $2.7 million higher. Increased operating expenses of $3.9 million were offset by expense recoveries of $2.9 million, and recoveries of bad debt reserves of $1.3 million. 153 MOB leases were executed during the quarter, totaling approximately 374,000 square feet, increasing the portfolio's lease space to 91.1% at year end, up from 90.9% at the end of the third quarter. Of this total, approximately 138,000 square feet related to previously-vacant space and the remaining 236,000 square feet related to renewal of previously-occupied space. The renewed leases brought our retention rate for the year to 78%, within our normal range of 75% to 85%. MOB lease rollover for any 12-month period of time typically averages between 13% and 17% of the portfolio, with average lease terms of four to five years. In addition to this core rollover, approximately 2% to 4% of the portfolio consists of holdover tenants who are on month-to-month leases as renewals are being negotiated. Month-to-month leases totaled 407,000 square feet at year-end 2007, or 3% of the portfolio, and we expect to renew approximately 90% of these leases.

The core lease expiration for 2008 is 17%, and prospects are good with approximately 15% of the remaining 2.1 million square feet of expirations already leased or in build-out. In addition to our normal expected retention, we have a pipeline of nearly 140,000 square feet of new leases under discussion. We had no MOB acquisitions for the quarter and sold one asset in San Diego to the anchor tenant for $8.6 million, resulting in a gain of $3.5 million. We completed the shell build-out of a 123,000 square foot MOB in Colorado Springs which is 75% preleased to Memorial Hospital, the number one hospital in the community with a 57% market share. Our predevelopment pipeline includes seven properties totaling approximately 641,000 square feet with a projected cost of $167 million. Skilled nursing reported solid same-store growth of 4.2% year over year, driven by rent resets in two of our skilled nursing portfolios. Cash flow coverages and occupancies for the portfolio remain stable at 1.5 times and 86.1% respectively.

Hospitals. Same-store growth in our hospital sector of 1.7% year over year was in line with expectations. Occupancies are stable and cash flow coverage for the total portfolio increased year over year to 2.4 times. Life science. The Company's life science portfolio experienced strong operating results in the fourth quarter, as tenant demand in HCP's core markets of south San Francisco and San Diego continue to produce leasing results that exceed our underwriting assumptions. During the fourth quarter, HCP completed approximately 423,000 square feet of leasing activity, split 55% to 45% between San Diego and the Bay area. Of this total, 313,000 square feet related to new or renewal leases on previously-occupied space that resulted in a mark-to-market increase of rents of nearly 40% over expiring leases. The remaining 110,000 square feet of leasing related to previously vacant space.

These results have meaningfully reduced available space in our portfolio to approximately 396,000 square feet. As of 2007 year end, the portfolio was 93% leased, up from 90% at the end of the third-quarter 2007. The Slough assets, representing 5.2 million square feet, were 91% leased up, from 88% last quarter and 82% at acquisition announcement. Leasing prospects for 2008 remain robust, with 45% of 2008's 376,000 square feet of expirations already renewed or released. This, combined with the pipeline of over 350,000 square feet of leases in negotiation, should produce additional occupancy gains and income growth, as rents are rolled to market. We expect to mark-to-market rental increases on 2008 expirations to range from 25% to 35%.

On a same-store basis, the life science portfolio consisted of only nine assets representing 739,000 square feet or approximately 12% of the portfolio. Income from these HCP legacy life science assets were down nearly 28% year over year on a cash basis. As Mark previously mentioned, the decline was due to the repositioning of the former Elan campus in San Diego, California. Repositioning of this campus is complete an the same property portfolio is now 100% leased. It is worth noting that rents at the former Elan campus increased from $3.9 million per year to $6.9 million, representing an increase of 77% over expiring rents. Excluding the Elan campus, same store was up slightly on a cash basis for 2007 versus the previous year.

The Company's committed development pipeline is unchanged from last quarter and totals 544,000 square feet in six buildings in our south San Francisco biotech cluster. As we discussed last quarter, these buildings represent new, best-in-class life science space and are 86% preleased to investment-grade tenants Amgen and Genetech. We expect to complete five of these preleased buildings totaling 466,000 square feet over the course of this year. Genetech will take approximately one-half of the space in the first half of 2008 and the remaining half will be delivered to Amgen in the fourth quarter of 2008. The future development and redevelopment pipeline represents an aggregate 3.3 million square feet of expansion opportunity in south San Francisco, Torrey Pines, Poway, and Carlsbad.

The changes we have made to the portfolio provide HCP with three distinct rent cash flow streams. Our senior housing portfolio, along with hospitals and skilled nursing, provide HCP with long-term, high-quality private pay, low turnover, growing cash flows. The MOB portfolio has higher expirations but higher retention ratios than traditional office, allowing HCP to roll 15% to 20% of the portfolio to market each year while maintaining occupancy. Finally, the life science portfolio leases are longer term with lower annual rollover, but have significant near-term growth potential. These three distinct rent cash flow streams are complementary and when layered together with our joint venture, development, and mezzanine debt platforms help to further diversify HCP's growth opportunities.

With that review of HCP's portfolio, I'd like to turn it over to Jay.

Thanks, Paul. We are especially pleased with the continued strong momentum of our life science portfolio, with 423,000 square feet of lease-up and 40% mark-to-market increases in the quarter. I will now touch upon a handful of topics; HCP's business model, revenue quality mix, delevering plan, current environment, and conclude with a look ahead.

HCP business model. In 2007, we reached critical mass with four product initiatives, defined to be platforms of $1 billion or more, that are expected to enhance returns for HCP's shareholders across our property segments. These are, one, development. As part of our Slough estates acquisition, HCP now enjoys a focused development and redevelopment platform representing 3.3 million square feet of laboratory office opportunities in the land-constrained San Diego and San Francisco Bay area markets, two of the three largest life science clusters in the world. Our life science development is mostly build-to-suit in response to tenant demand. Two, down REIT. Our February 2007 Medical City Dallas acquisition was structured as a down REIT, the largest down REIT ever executed by HCP. We have now closed over $1 billion of transactions, structured to include HCP equity as a meaningful component of the consideration to the seller.

Three, investment management. In January 2007, we contributed 25 senior housing facilities, operated by Horizon Bay, into a newly-formed joint venture with an institutional capital partner. HCP now has approximately $2 billion of assets under management in institutional joint ventures, where HCP functions as the managing partner and minority investor of real estate portfolios in the medical office and senior housing sectors. By partnering with high-quality institutional investors, our shareholders realize fee income and promoted interests, in addition to the pro rata share of cash flows from our ownership. Four, mezzanine debt. HCP has a $1.3 billion mezzanine debt portfolio invested in the leading operators in the acute care hospital, specialty hospital, and skilled nursing sectors. Mezzanine debt is a natural extension of our real estate equity underwriting expertise and generates attractive current returns, albeit for shorter timeframes than our traditional equity investment activity.

The substantial completion of HCP's multi-year repositioning results in a portfolio diversified across five property types; senior housing, life science, medical office, hospitals and skilled nursing. The investment structures are further diversified across five products; sale lease-back, joint ventures, development, down REITs, and mezzanine debt. Our five-by-five investment model, unique within the REIT industry, creates multiple FFO growth drivers and allow HCP to flexibly deploy and recycle shareholders capital across a variety of operating environments. One of the significant competitive advantages created by our portfolio repositioning are the concentrations of relationships with the premier players in each of our five property types. These include for senior housing; Sunrise, Ericsson, Horizon Bay, Aegis, and Brookdale. For medical office buildings nonprofits, such as Swedish Medical, Norton, and Ascension, in addition to HCA. For life science, Genetech, Amgen and Pfizer. For hospitals, HCA and HealthSouth For skilled nursing, Manor Care and Trilogy.

If you will recall, our previous comments of reworking our portfolio in the context of the retailing industry's SKU concept, key to our portfolio repositioning was the objective of acquiring concentrations of newer, higher barrier to entry healthcare real estate, operated or occupied by the leading players in five diverse sectors of the U.S. healthcare industry. As part of this rework we have consistently recycled noncore one-off properties, especially real estate with exposure to state-based Medicaid government reimbursement. Revenue quality mix. We have recently reviewed the underlying revenues for all the rental and interest income flowing into HCP. We grouped the source of these underlying revenues into either, one, private pay and Medicare, or two, state-based Medicaid programs, and excluded our life science and medical office sectors where there is virtually no Medicaid exposure. For the year ended December 31, 2007, 94% of revenues from HCP's facilities were derived from private pay and Medicare sources. For the facilities comprising the 6% Medicaid exposure, our coverage ratio was in excess of 1.5 times after management fees.

Delevering plan. Our delevering plan has two elements; one, returning our credit metrics, especially our leverage ratio, to pre-Slough levels, and two, terming out our floating rate debt. Our leverage ratio stood at 52% before we announced Slough and 62% after we announced Slough. By the middle of December, two months ago, we had dropped our leverage ratio from 62% to 56%, before taking it to its current level of 57% following our year-end Manor Care investment. We intend to reduce our leverage ratio to its pre-Slough levels by July 31st of this year through asset sales of $750 million. Of this volume, we are in receipt of executed LOIs from interested parties for half of this $750 million and in active discussions for the remainder. With respect to terming out our short-term borrowings, we intend to wait for some level of normalcy to return to the credit markets prior to refinancing the balance.

Current environment. Our five business segments are performing well. If you were to envision a performance scale on a continuum of not so good to the left and excellent to the right, I would place each of our five businesses on either side of the very good designation. Life sciences would be on the excellent side of very good, MOBs and skilled nursing would be right on the very good metric, and hospitals and senior housing would be on the good side of very good. Given the slowdown in the U.S. economy, we are particularly pleased to have our portfolio repositioning behind us. The long duration, reliable nature of our leases and the premier client relationships that we have added to our portfolio sets HCP up quite nicely in the current environment. We are particularly pleased with the significant reduction in our Medicaid exposure, given the growing budget deficits we observe at state government levels.

I have taken a half dozen or so calls since the start of the new year from institutional investors looking to partner distressed healthcare situations with HCP. On each occasion I point out there's relatively little distress in healthcare, certainly nowhere near what is being felt in other sectors of the economy. One need only to look at last week's HCA earnings announcement and the price performance of our toggle note investment in that company, for confirmation. The bottom line, people still need healthcare in a recession.

Away from the strong underlying healthcare fundamentals, we have seen the current credit environment cause prospective joint venture partners to either retreat to the sidelines for the time being or seek more opportunistic possibilities, particularly international strategies. As a result, we have elected to pull back the current joint venture marketing of our Med Cap MOB portfolio and substitute other asset dispositions as part of our delevering plan. Our Med Cap portfolio once again exceeded expectations in 2007, posting a 100 basis point increase in occupancy and a 3.5% same-store cash increase in NOI. With respect to acquisition activity, the turmoil in the credit markets continues to lower volumes across the healthcare REIT space. We expect first quarter 2008 transaction activity for the sector to continue to moderate from 2007 fourth quarter levels. At HCP we are actively reviewing a number of opportunities. In this regard, the high quality concentrations in our existing portfolio represent a significant competitive advantage for the Company.

A look ahead. To give the repositioned HCP enterprise some context, our five-by-five business model has created multiple growth drivers projected to generate a 7.5% increase in reported FFO from our record 2007 results, without the need to deploy any shareholder capital for acquisitions in 2008. If you were to set off to the side the Company's attractive mezzanine debt investments -- comprised of the number one industry leaders in the acute care hospital, specialty hospital, and skilled nursing sectors -- the remaining portfolio is long-duration, inflation-protected, reliable rent streams in lab and medical office and private pay senior housing, located in high barrier-to-entry markets, concentrated with the leading players in each of these sectors. In the space of a few short years, HCP's portfolio has been reshaped from a position of chasing the aging baby boomer demographic in the United States, to a position of catching this demographic through the balance of the next decade.

At this time, we'd be delighted to take your questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Mark Biffert from Goldman Sachs. Please proceed.

Hey, guys. First question, Jay, related to the assets that you guys plan to sell. What property types do you think you're going to pull for those sales?

Mark, we'll have four of our five property segments represented, everything but life science, in that plan.

Okay. And of the tenants that are leasing that you have projected tenants for the life science portfolio in '08, what tier rating are those clients in terms of credit quality and overall quality of the tenant?

Well, it ranges. I think for -- some of the discussions that we're looking for example up in the Bay area with some of our prospective development starts, those would be very significant life science entities. I think at the other end of the spectrum, you'd see the opportunity to bring in some small private companies. But I think it would definitely be weighted, as the whole portfolio is weighted towards very substantial, profitable life science players.

Okay. And question for Mark. In your interest and other income during the quarter, I noticed it took a big jump. What was in that $21 million that you show on your income statement?

The prim -- there was $3 million -- in interest and other incomes there was $3 million in there from Manor Care was the primary increase.

Okay. That's it. Thanks, guys.

Your next question comes from the line of Kevin Fischbeck with Lehman Brothers. Please proceed.

Thanks. Good morning.

Good morning.

I had a couple questions for you regarding Slough. Previously you had broken out the leasing rates there between the stabilized and the assets that were in lease-up. Could you break that out again this quarter?

The assets that are in lease-up?

Yes.

As far as rental rates? What we expect to get?

Well, last quarter you had said that the assets that were in lease-up had moved up to 57% occupied whereas the stabilized assets had gone from 95% to 96%. Do you have the similar breakout this quarter regarding Slough?.

I can get that broken out for you. We have not done that this quarter.

Okay. And then I think that last quarter you had indicated that regarding Slough you had no development starts planned for 2008, but due to the strength that you were seeing you were thinking about revisiting that. Any updates there?

Yes, I think the update, Kevin, is that we have moved into more active discussions with some prospective tenants for those properties. There's obviously incredibly strong demand, particularly up in the life science -- the south San Francisco life science corridor, which you need look no further than the lease-up performance we achieved again, fourth quarter, on top of the third quarter result. So we're pressing ahead as quickly as possible through the entitlement process and continuing those discussions and feel very good about them.

Okay. And I guess looking at the disclosure, it looked like one of the land parcels that you had, I guess dropped out of land held for future development, the Torrey Pines science park is no longer there. Can you say what went on there?

What we had is we have -- we reclassified some of that stuff as redevelopment as opposed to just land held for development, so that's changed the characterization there.

Okay. So you still have it and you're still --?

Still have it, but it's more redevelopment as opposed to land.

Okay. And the last question, a follow up to one of the earlier questions, about the assets that you're now looking to recycle. It sounds like you weren't necessarily planning on originally divesting these but the Med Cap delay pushed you in this direction. Are these assets that you were going to sell anyway, or --?

These all represent the same profile of the $3 billion plus assets we've recycled over the last couple years. They tend to be good performing, economically viable assets, but they tend to -- again, going into that retailing SKU concept be one-off properties, a series of one-off operators represented in our portfolio. So as we increasingly try to strategically move the Company to concentrations of holdings, it sets up nicely in that regard. So feel very good about that. We're far along in discussions and we will be able to provide you with a further update here in the next couple months.

Okay. Great. Thanks.

Your next question comes from the line of Craig Melcher with CitiGroup. Please proceed.

I'm here with Michael Bilerman, as well. In terms of your capital plan, beyond the disposition, sounds like you were doing some forward starting swaps to mitigate what you expect to do in other capital issuances. Can you give a little more color on what you're expecting to do in the year and what's included in guidance?

With respect to capital?

Yes, with respect to debt or equity issuances that you're --.

No, we've entered into forward swaps aggregating about $900 million, did that in the fourth quarter. So the asset dispositions, if you recall, it'll complete the equity component of our delevering plan and then we will -- that takes our existing metrics back to where they were pre-Slough and then the remaining piece will be to term out the floating rate debt. And as I said, we're going to -- we really become more of an investor in debt, given the uncertainty in the markets here in the last couple months as opposed to issue. so we'll wait for some return to normalcy there before terming out the floating rate debt piece of the plan.

Would you look to the unsecured market? Would that be the first place to go?

Yes, we're fortunate. We're active either as investors or issuers or both in all the markets. Right now I would say the unsecured debt markets are probably the least attractive to us in terms of straight debt. I would say that the agency market with respect to our unencumbered senior housing markets are probably the most attractive, and the other markets that we access are somewhere in between those two end points. We've got a number of possibilities here and as we've consistently done over the last several years, we'll optimize that based on what's available.

Last question. What do you -- what is that -- that what your floating rate debt will be as a percentage of total debt by the end of '08 due to all your plans?

Well, right now it's 36%, but as Mark indicated, I think you probably -- if you offset that with the floating rate Manor Care investment, you're down to about 24% and our plan would result in our floating rate debt exposure by the end of the year returning back to our low double-digit, 10%, 12%, 13% zone that we've consistently managed the Company at. Very modest floating rate debt exposure.

Actually it would -- on a net basis it'd be down to around 10%.

Thank you.

Your next question comes from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Hi, a couple things. I guess the first one just on tenant improvements, I think it was about $22 million this quarter. I thought your guidance had been about $15 million . I'm just trying to understand. I know it might bounce around quarter to quarter, but what's your sense as we go forward for

Okay, you're right, it does bounce around quite a bit from quarter to quarter. Going into 2008 for lease initiatives [then] capital improvements, I'd say best guess would be around $66 million, and probably starts off around $20 million in the first quarter and declines over the quarters, down to about $10 million in the fourth quarter.

Okay. All right, great. That's helpful. And a couple questions related to the mez financing. Do we know at this point how it's going to be categorized, whether it's held for sale, or available -- or held to maturity, available for sale, trading security. I'm trying to understand, again, if there are fluctuations to valuation, how those might flow through?

Okay, there won't be fluctuations to value. It's categorized as a loan as opposed to marketable debt security.

Okay? And it will be categorized as held to maturity.

Okay. And Jay, just to come back to market issues, you talked some about debt markets in terms of you as an issuer, but prospects for that being sold, is that included in your asset sales or is that something else that is on hold until the markets stabilize?

I'm sorry, Jerry, I didn't understand that.

The mezzanine debt, is that part of -- your assets held for sale, is that included in that category, or again, is the mez debt something you're likely to hold now a little longer, given the uncertainty in the credit market?

We're in a fortunate position of having multiple levers to pull on and we'll optimize that for the benefit of the shareholders over the long term. So we've got a lot of cards we can play and right now in particular I think that unsecured debt market would probably be the least attractive on the mezzanine debt. We were very pleased to see a very high quality organization that we are very close to come in and invest in the 35% to -- 36% to 55% piece in the Manor Care capital stack, which was in excess of $1 billion. So there's a -- the Company is performing -- Manor Care is performing at a -- continues to perform at a record performance and given the economy with that company's high component of labor expense as opposed to the overall expense profile for that company, again, sets up very nicely here. So I think we've got an attractive investment there and that's certainly one of the things that we might take advantage of.

That it might be sold or it could go either way? Is that basically what I'm -- ?

Yes, that's right.

Okay. I think that's basically it for me. Thanks.

Your next question comes from the line of Rob Mains with Morgan Keegan. Please proceed.

Thanks, hi. A couple more questions, Mark, on the [fat-type] numbers. Straight line rents were down from last quarter, if you take out the Emeritus chunk in Q3. Is that the run rate that you're looking for for '08?

The run rate -- it's close. For 2008 I'd say the run rate on straight line rent for the full year will be about $35 million.

Okay. So a little bit down from where we are now?

Yes, correct.

And then also I noticed -- I know this is a kind of a small number. The amortization of debt issuance costs, again if you adjusted for -- it was one time last quarter, it was up a lot. Was there anything going on in the quarter that was one time in nature in that line?

Yes, your very astute question. Because we paid the bridge earlier than we had originally anticipated when we did the forecast, there was some additional amortization of the bridge loan fees in the quarter and that was about $800,000.

Okay. But that's all?

That's all. Other than that, the quarter was pretty much in line with our previous guidance, absent -- absent little changes in fluctuation in rates.

Right. And then my only other question was if I look at the same-store numbers, I know that you can get quarter-on-quarter fluctuations but the growth that you had -- your adjusted same-store NOI growth for the senior housing business was low in the quarter and absolute number was pretty low. Is there anything going on there? Because I'm assuming from your comments that it's not a case of weakness in the markets, which wouldn't really be reflective for you anyway. It was 0.3% for the Q3 to Q4.

That's pretty normal for third quarter to fourth quarter in that particular space, because of the way the increases work through the course of the year.

When do you get the big bump? Is it Q1, typically?

Yes.

Okay. All right, that's all I had. Thank you.

Your next question comes from the line of Rich Anderson with BMO Capital Markets. Please proceed.

Thanks and a good morning to you, guys. Just a question on the life science portfolio. I know you have Amgen as your top tenant and they're locked in on their leases, but they're also counted on to fill future development and given that they are in the process of cutting 14% of their work force, do you have any issues at all in front of you in terms of them taking development space that they planned on that they may not in the future?

No, no, it's all contractual. It's all taken care of.

Okay. The pre-lease number of 86% for life science, isn't that the same number that it was when you came out of the box with this acquisition? And I was wondering if you'd comment on your leasing activity for those specific projects?

Yes, we've got about 600,000 square feet of leases that have been signed and what you're going to see is about half of that space will take occupancy in the first quarter and then the remainder will be split between the second and third quarters so you should start seeing occupancy gains at the end of the first quarter.

But the 86 is the same number that it was, but we should start to see that --?

Yes, Rich, it's five properties that are contractually going to be delivered. As Paul said, a few in the first half of the year, the remainder if the second half of the year, so those -- everything related to those projects is completely on track.

Okay. On the bridge -- just to throw in my bridge question -- just to set expectations, would it be your guess, at least, that you'll get through the first extension period on the bridge? Is that where your mind is right now?

No. Right now we're sitting with our -- our metrics are very, very solid; 57% leverage ratio, 12% secured debt ratio, fixed charge north of two times. We expect the asset sale to close before the one-year anniversary of the July 31st. In fact, we expect over half of these asset sales to close on either side of the end of the first quarter, so a good chunk right at the end of the first quarter, right at the beginning of the second quarter. That will check the box on our credit metrics. And then as I said, we'll be opportunistic on the terming out of the floating rate obligation at that point. At that point we'll have rebalanced the debt to equity ratios for the Company, so it'll be just an opportunity that when we see attractive to term out the floating rate debt. You'll recall that we've got a very attractive credit facility there that with the accelerated paydown of our bridge now with the final maturity out to July '09, and we're currently borrowing on that facility at 3.84%. So we're in a very fortunate position and we'll wait for some normalcy to return to the credit markets.

Certainly well priced, that's for sure. As an expectation, we should expect some -- say, something shy of $1 billion of the bridge outstanding and then take advantage of the exten -- the six months extension and then we'll go from there and see where the he'd credit markets go, is that a fair way of looking at it?

Our plan is to have the leverage metrics of the Company back in place to where they -- we committed they'd be by July 31st, as well as the remaining bridge paid off by July 31st, so we're working towards that metric. It's nice, given the success we had in paying down the bridge, to have the flexibility to push that out as much as 12 months, but that's not our base plan.

Understood. And then just shifting gears, a couple more quick ones here. You mentioned the growth rate. I think you said 5.7% FFO growth with no acquisitions.

Actually, I said 7.5%. 7.5% with no capital going out to acquisitions and that includes the disposition activity.

Okay. So what is the mez loan business contributing to that growth rate? If you were to just, say, look at the property level, is it 100 basis points of that 7.5%? Is it less? Is it more?

You've got same store. You've got-- as Mark mentioned, the two big drivers '08 over '07 are the continued strength above expectations for life science and Manor Care. I don't know, Mark, if you've actually between those two drivers allocated what percent of the growth goes to one. If we haven't, we can certainly undertake to do that.

Is that a no?

That's a no.

Oh, okay. Okay. And then lastly, you mentioned that the dispositions will come through on all the buckets with the exception of life sciences. Could you see senior -- I'm sorry, skilled nursing going to -- sans the mez loan, the skilled nursing portfolio going to zero?

Probably not to zero. Probably not to zero. Recall, ex our Manor Care investment, it's already down to 2% of our portfolio, Rich, of our portfolio, so no, I think -- I think we've been very consistent on this. We haven't -- the bugaboo we have on that space is not the space broadly defined, it's Medicaid exposure. So we bought that [Panum] portfolio -- now, I'm dating myself now, but that was almost four years ago. We loved that portfolio and the thing we loved about it was the Medicare and private pay mix there was second only to Manor Care's, 73%. It was in the low 60s. So that kind of stuff, we like that. We have recycled a lot of skilled that had the Medicaid exposure. But we're not -- it's not like we've got a red X up against the skilled space. It's the Medicaid exposure that we're particularly focused on.

Understood. Okay. Thank you.

Yes.

Your next question comes from the line of Michael Mueller with JPMorgan. Please proceed.

Hi. A couple questions. First of all, looking at the Manor Care loan, you mentioned about $3 million of income in the quarter from that. For the noncash portion of that income, if I'm looking at page eight in the supplemental disclosure, which line is the non-=cash portion in when you look at the -- I guess the interest accretion, the FAS 141, et cetera?

Yes, it's in the interest accretion number.

Okay.

So for the full year, $1.7 million, it's in that number.

Okay.

It was only about $400,000 for the quarter.

Okay. That was the minor pick up. Looking at the deleveraging --

Michael, just on the point, at closing of that loan, in terms of where LIBOR was then, at closing the spread was 660. I think -- if I'm off I'm off a little bit, not much. I think the cash spend was about 500 of that 660 and the amount that was going to get accreted in was about 160, so the vast majority of that is cash interest. Now, that will change a little bit as LIBOR changes, but directionally that ought to give you some feeling for what's going on there.

Okay. And then when you sit there and add up all the pieces, the tenant improvements, the straight line, et cetera, how do you guys feel about dividend coverage this year and just how that is looking, because I know you raised the dividend recently?

Yes. Well, I think our FFO payout ratio on -- I think Mark gave you the metrics -- on a pre-merger, pre-impairment is about 79%, on an as-reported, it's about an 83%. I think at the mid point of our range our FAD is about a 96%. I think we're very mindful of some of the changes that we have done in our business models. The impact and probably the increasing importance of FAD to our new model versus maybe what the importance of FAD was two or three years ago when you really didn't have much of a differential between FAD and FFO. So that was absolutely something that we focused on in terms of dividend increase. But I'd point out, we've kind of been to the movie before, if you recall, five years ago. The FFO payout ratio for the Company was 101% and we grew the dividend all the way through, as we have in every year the Company has been public and as we intend to do going forward. But we brought that 101% FFO payout ratio to 79% or 83%, depending on what metric you want to look at projected for '08. But I think we are mindful of the fact that FAD's going to be more important, given the medical office and life science components of our business model going forward.

Okay. And then just going to the deleveraging, I know you talked about capital market transactions. I think you talked through what you were thinking in terms of the short-term debt. Is equity a possibility at this point, or do you think that's almost completely off the table because of the asset sales you have lined up?

Well, we're focused on these asset sales. The next couple months we're focused from a delevering standpoint on asset sales. If we saw something on the acquisition side of the house that was as compelling as either Slough or Manor Care, we might look at a number of other alternatives. But for now, as I mentioned in my comments, you still have a little bit of this phenomenon that I described on the last call, kind of two ships passing in the night in terms of compelling sorts of opportunities to deploy incremental shareholders' capital for HCP. We think things slowed down for the whole healthcare REIT space in the fourth quarter. We think they're going to moderate a little bit more here. We are starting to see a thaw, quite frankly, so at some point there might be some opportunities here. But near term, we're in a position of looking at a lot of things, nothing is what I would term on the acquisition side in the red zone right now, which is a little bit of a different phenomenon that we've been in for the last couple years, where we always seem to be looking at a number of things that were actionable near term. We're looking at a number of things, but I don't think any of them are actionable near term as we continue to get some rebalancing of sellers and buyers perspective. That's how I would respond to that question.

Okay. Great. Thank you.

Your next question comes from the line of Jim Sullivan with Green Street Advisors. Please proceed.

Thank you. First of all, thanks for the additional information in the supplemental. The quantity is significant, gut the quality, which is more important, is terrific, as well.

Well, thanks for your suggestions.

A couple of questions. On Sunrise, if I heard correctly the coverage actually dropped below one times during the year and I think you referenced some operating expense challenges that they had. Is there any evidence that the problems that Sunrise is having at the corporate level has caused them to take their eye off the operational ball?

Yes, actually coverage ratio improved in '07 versus '06, Jim. Let me say this. They have had more than their fair share of distractions and it's amazing the confluence of events there. I would say that our portfolio -- our Sunrise portfolio had a good performance in 2007, nice gains in occupancy, nice NOI growth. We spend a lot of time with the Sunrise folks, as you might imagine. I would put those conversations into two areas of discussion. One is going property by property, looking for opportunities to reinvest some additional capital to increase the value of a particular property. That's really more at the micro level.

At the macro level I would say that we have had a lot of discussion with the company about the growth rate in expenses, relative to the growth rate in revenues. The growth rate in revenues is fantastic, low double-digit metric. But we'd like to see a bigger chunk of that drop in the bottom line. We've had discussions ever since we acquired the portfolio. I would say that those discussions have gotten very constructive in the last quarter or two, and more importantly, we've actually had some tangible results come out of that with respect to one or two of the expense categories. So we're feeling very good about where that portfolio is and to answer your question, we have not seen any impact on the performance. I would point out, Jim, that our portfolio -- our portfolio is for the most part stabilized. So we've got less moving parts going on in our portfolio than, for example, a portfolio that had repositioning going on or development or things like that. So for the most part, we have a stabilized portfolio, and as I said, we're pleased and looking forward to an even better result in '08.

And what's your perspective on what might happen at the corporate level?

Well, I don't think the outcomes have changed. I think they continue to be in a process. I think first, second, third priority is to get their financial statements current and filed. We have had the opportunity to visit with the new CFO a handful of times now in the last couple months and come away very impressed with him and his track record at Mills and we are of a belief that they will meet their commitments and their deadlines. I think I've said to this group in the past, if you look at the property information we get for all of our senior housing operators -- this is why I feel so confident about what's going to happen with respect to the financials at Sunrise -- the quality and the timeliness of the property level accounting information we get from Sunrise is as good as anybody else in our senior housing portfolio. So I think Rick's going to get that taken care of and at that point the obvious two outcomes would be they continue to -- continue as a very viable publicly-traded entity, leader in a space that's got a tremendous demographic, both in the states or outside the states, or they may continue to consider some sort of sale process.

That's helpful. And then switching gears to asset sales, Paul. Can you comment on cap rate trends in the four out of five business lines where you expect to sell some properties?

Let me just take it, Jim, because cap rates are -- I think the most important thing we're seeing is underlying businesses are performing across the board extremely well. I think I commented on that sector by sector. So I think that's the best thing and I think the folks that we have entered into these discussions with and have executed LOI's all have committed and available capital. %hey've all done this before, so they're strategic players so we're very confident about moving forward. I wouldn't expect to see much in the way of change. I think there's been, I guess, one transaction announced earlier this week in the senior housing space. I think that's about the only transaction that's occurred in the last couple months. But we feel very good about closing off this component of our delever plan.

And then finally, with respect to Amgen, I understand they have a contractual obligation to pay rent, but to the extent they sublease a significant amount of space, what level of concern do you have that that sublease activity might impact either the balance of your existing portfolio or prospectively your ability to develop?

Well, I think we are very comfortable, given that that space is in south San Francisco, the birth place of biotechnology, and the current life science vacancy up in that submarket is between 2% and 3%. If this space was down in Carlsbad, where we own some land, I think that might potentially delay the development of that -- of the land we've got down in that community. But up in south San Francisco, Paul's given you a flavor of the mark-to-market rent increases. The tenant demand is -- continues to be very strong, so strong that we are pressing ahead as quickly as we can with respect to development opportunities there. And the lease space for Amgen in light of the life science would not move that vacancy much at all, Jim.

Thank you.

Your next question comes from the line of Dustin Pizzo with Banc of America. Please proceed.

Hey, guys. Just a follow up on some of the other earlier questions on the bridge. If you do, in fact, take advantage of the extension is there any change in pricing or does it stay at the current price?

No, there's a -- for each extension, the way we structured that, we had a -- we put an incentive in to pay that off, so we moved some of the front-end fees to the extension, so there's an incremental fee that is on the first extension. On the second one I think about -- is it 15 basis points for each one or is it 12?

About that.

About 15 basis points.

Okay, that's all I had. Thanks.

Yes.

(OPERATOR INSTRUCTIONS) You have a follow-up question from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

I'll try and be quick because this is going on. Just I wanted to get a little bit more color, really, on primarily just the senior housing occupancies, because in the data that you put out -- and I recognize certainly same store is a tiny portfolio -- but you've got quarter over quarter declines in occupancies, not much movement in coverage and you talked about year-over-year occupancy gains look a lot better. You've got some pickup in NOI. You made the point -- I don't know who this is exactly directed to -- you made the point, maybe Paul, that you were seeing no impact housing market and that sort of thing. I was just wondering if you could give us a little more color. There was a lot of discussion about Sunrise, but separate from Sunrise, maybe in the IL, any more color we can get would be helpful?

Okay, I think it's on page 24 of the supplemental, Jerry, if you look at not the same property portfolio for senior housing because, as Paul remarked, that's actually such a small component, but the overall, but the quarter --

Quarterly occupancy you're off like 20 basis points, year over year you're up like 40 basis points.

Yes, I wouldn't say that's terribly significant. Now, we've continued to chat up our operators on a regular basis and in fact I was on the phone with our largest operator down in the Florida market and their occupancies are holding just fine between 94% and 95.5% increases. They're getting a little bit of pushback on rate, but notwithstanding that, they're still being able to achieve some nice year-over-year rate growth. So that's Florida. The Sunrise, we've talked about.

And we see in the overall portfolio, 90% -- being on either side of 90% is kind of a stabilized number and it's going to fluctuate on either side of 90% at any given time.

Again, the back drop for all this, which is, I think, very, very good news for like the next couple years is there continues to not be a meaningful amount of supply coming on. I would quite frankly speculate that in light of what's going on in the world, I don't think that's going to change in terms of accelerating the development any time soon. So I think the -- anecdotally, the CEOs that run the portfolios that we own that have all talked to in the last couple weeks will say that their business is slowing in terms of moving away from some of those double-digit year-over-year rate growths, but they're still getting 5%, 6%, 7% depending on the market in terms of bumps and holding occupancy. So they feel it's not go go time like it was maybe 18 months ago, but certainly a very, very solid business with the absence of much supply.

I think, quite frankly, from a healthcare REIT perspective, what happens here -- this is why at some point here this log jam will break on the ability to deploy capital, but a lot of not short term but intermediate things look like they're positioning or breaking in favor of the healthcare REITs. The operators are going to be a little more challenged with respect to the capital versus the environment they were in '05, '06, '07 timeframe, with the multiples on their stocks and the ability to access the secured debt markets and so I think that's very good. Increasingly we're seeing the private equity shots, which we have a preponderance of them in our existing portfolio given the transactions we've done with HCA and Atria and Manor Care, increasingly becoming more of a profile of a partner for HCP as opposed to a competitor. I think we've got to ride out the turmoil in the credit markets, but I think we get through this here and we're not predicting it's going to happen any some soon. I think things in the intermediate term start to break on a relative basis back in favor of the healthcare REIT. We're very, very excited about what we see in terms of the underlying fundamentals of our business and also some macro issues that ought to advantage our Company.

Okay. And would you consider getting involved in mez with something like a Sunrise if they end up going private?

Mez, again you think about a matrix, we've got our five property types going across the [picone], so going across from left to right; senior housing, medical office, life science, hospitals and skilled. And then we've got five major products that all have billion dollar platforms now, and one of those billion dollar platforms is mezzanine debt, so everything's on the table. Let me just say I think it's important to understand how this model can work for us. Take HCA. We obviously got to know HCA extremely well back when we did the transaction Med Cap transaction back in '03 and that represented an ownership stake in real estate, so we had -- a number of leases were directly to HCA so I checked the product sale leaseback box. Part of that transaction, if you recall, was structured as a down REIT, so that was a second product. And part of it was some development properties, that's a third product.

We continued to do development with HCA of medical office over the last years and then did the mez debt investment as part of their LBO. We've been able to deploy a significant amount of our shareholders' capital into that company, HCA, across all five of our product platforms. I think that's where this platform can really accrue to our benefit. In the current environment we're continuing to troll for new opportunities. I'd point out that two of our five product platforms are joint venture platform, where we've got a couple of investors that still have remaining dry powder with respect to their commitments to us and the down REIT platform, neither of those two platforms require much in the way of capital going out the door from our shareholder. So we've got a lot of different ways we can play these different sectors and we're very fortunate to be in that position.

Thanks. Appreciate the time.

At this time, there are no further questions. I would now like to turn the call over to Jay Flaherty, Chairman and CEO for closing remarks.

Thanks for your continued interest in HCP and we'll talk soon. Take care.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.